|Gerardo Rodriguez Regordosa, managing director and senior investment strategist of BlackRock's emerging markets team|
“It is difficult for countries, especially those that have important external borrowing needs,” says Rodriguez, the former undersecretary of finance and public credit in Mexico, who joined asset manager BlackRock in April as managing director and senior investment strategist of its emerging markets team. “[These countries] are more vulnerable to the correction that we are seeing. Investors are very focused on those countries that have either current account deficits, have a less institutional backdrop or have shown some hesitation in policymaking by which the government has introduced an element of concern to the marketplace.”
Rodriguez identified Turkey, Brazil and South Africa as examples of countries that are suffering from poor investor sentiment. When asked specifically if he believed Brazil’s policymakers would have to adapt their approach in response to the falling currency and general negative sentiment towards the country, he agreed. “The lack of reform momentum is being questioned at a time when the environment is more challenging and so the policy response is going to be the only way to generate a better economic growth environment,” says Rodriguez. “Hopefully we can see that the policy response function is going to operate in the right direction and these market corrections that we are seeing are actually going to lead governments to adjust policymaking in the right way in order to help the economy withstand better the test to which they are being submitted.”
BlackRock declined to talk about specific investments, but according to Bloomberg the asset manager had reduced its exposure to the potential default of bonds issued by OGX Petroleo & Gas Participações. BlackRock’s most recent regulatory filings show it cut its holdings to $69 million – a reduction of about 70% of its holding. This contrasts with Pimco, which kept buying OGX paper – adding $170 million in the six months leading up to March 2013, taking its total to $576 million – as the price of OGX’s 2018 bonds fell to under 20 cents on the dollar by the end of August, pricing an expected default. Pimco is now believed to be one of the lead investors that has mandated Rothschild to advise on a potential debt restructuring.
“Investors need to understand – just in case someone forgot – that investing in emerging markets is a strategy of higher risk and higher volatility,” says Rodriguez, who believes that the current difficulties facing emerging market investments don’t undermine his judgement that the secular, long-term trend is for growth in emerging market asset classes – and local currency in particular. Rodriguez says that emerging market financial assets currently account for less than 30% of global financial assets despite emerging market countries now generating more than 50% of global GDP and having more than 80% of the world’s population. This has fed a secular movement into the emerging market asset class, which has been growing annually by more than 15% in recent years. “Now these dynamics are being challenged in the market, but in the medium term you can only think that financial assets in emerging markets will continue to grow and continue to drive the asset management industry – that’s a structural phenomenon,” he says. “You need to withstand the drawdowns from time to time and the fact that investing has the base rate, the credit component and the currency component altogether in a mix, requires developing detailed understanding in order to be able to manage that.”
In August, the Brazilian central bank took action against the falling value of the real by introducing a $60 billion currency-intervention programme. The central bank will hold daily auctions of $500 million in currency swaps to support the real between Monday and Thursday and will sell $1 billion in the spot market on Fridays. The programme – large by EM standards, according to Capital Economics – will run to the end of the year and as Euromoney went to press had been successful at stabilizing the real at between $2.30 and $2.35.
“The markets have a role to play by bringing this discipline that will allow economies to grow in the medium term and that’s a good thing,” says Rodriguez, who dismisses the suggestion the Brazilian government might resist the call for more investor-friendly policies in favour of a more managed response. “No one could be against sustainable growth, low inflation and low volatility and lower financing costs – and all of that is highly correlated with sound macroeconomic policy,” he says. “Markets like certainty, and good macroeconomic policy brings certainty and confidence, and confidence is the very construct of financial markets. Anything a government can do in order to build confidence is a good thing because it is in their interests.”